The Baltic Dry Index, a shipping freight-cost index, has been recording noteworthy growth in the last couple of weeks, closing to 2,000 points as of 17 October. In this brief overview, we’ll try to understand why this is happening.
First of all, the Baltic Dry Index, BDI for short, is a shipping freight-cost index issued daily on the London-based Baltic Exchange. It is used around the world as a proxy for dry bulk shipping stocks, as well as the general shipping market sentiment. Some would argue that it can also be used as an indicator of future economic activity. This is due to the fact that demand for shipping, and especially shipping of this size usually means two things: there is either a demand for commodities that get transported, or there is a limited number of ships available. For example, when the world’s economies started reopening in 2021 after the pandemic subsided, there was a massive increase in shipping costs, as many ships were also stuck in ports around the world, especially China.
This is when the index managed to reach its all-time high of 5,650 points back in October 2021. To put things into perspective, the 5-year average (starting from today and going backward) stood at 1,705 points, while the 10-year average stood at 1,361 points. This would mean that during that period, shipping costs were 231%, and 315% more expensive than those averages. Of course, huge disruptions across the world tend to cause things such as these.
A second example is the Russian invasion of Ukraine, after which the BDI jumped to 3,369 points, again almost 2x, and 2.5x higher than the 5-year and 10-year average, respectively. It has to be noted that the index is very much affected by not only the geopolitical and macroeconomic swings but also overall supply and demand. As such, short-term increases/decreases do tend to happen, as we can see in the graph below.
BDI index (2013 – 2023 YTD, points)
Source: Bloomberg, InterCapital Research
The latest conflict spot, the Israeli-Hamas conflict, also has the potential to drive up the shipping costs further. As all the previous conflicts/crises have shown us, this is quite disruptive. The whole situation, however, is quite complicated. Israel itself is not a large shipping country, nor does it export that many commodities, especially dry bulk commodities. Why the situation itself is delicate is the possible escalation involving other Middle Eastern countries, especially Iran. If this were to happen, Suez, and especially the Straits of Hormuz could be threatened, and given the amount of shipping that passes both of these on a daily basis, it would certainly have an effect of higher costs at the very least.
Of course, as we can see from the graph, the BDI has been increasing well before the start of the conflict. There are many reasons for this, mostly tied to the War in Ukraine, the better-than-expected economic data from the US, the historically low water levels in the Panama Canal, etc. As such, this conflict could be seen as a potential spark to increase the cost further, and by extension, fuel further inflationary growth as has happened in 2021 after the reopening of the economies (albeit again, for different reasons this time!). The BDI index currently stands at 1,972 points, representing a 30% growth YTD, and a 8% increase YoY. This also represents a level that is 16% and 45% higher than the 5-year and 10-year averages, respectively.
By the end of September 2023, Slovenian mutual funds AUM amounted to EUR 4.46bn, which is an increase of 15.4% YoY, 12.8% YTD, but a decline of 1% MoM.
The latest report on the Slovenian mutual funds’ performance has been released by the Slovenian Securities Market Agency, ATVP. According to the report, the total AUM of Slovenian mutual funds amounted to EUR 4.46bn, representing an increase of 15.4% YoY, 12.8% YTD, but a decrease of 1% MoM. This marks the 2nd month in a row that the AUM has declined on a MoM base, but the YoY data still shows that growth continues (15.4% YoY growth this month vs. 10.7% growth last month). However, the lower base recorded in the same period last year could be the reason for this “relatively higher” growth YoY, while the MoM data shows there has been a slowdown.
Breaking this down further and looking at the asset structure of the funds, on a YoY basis, the largest absolute growth was recorded by shareholdings, which grew by EUR 521m, or 19.8%. Following them we have bonds at EUR 93m, or 15%, investment funds, at EUR 40m, or 17%, and finally, money market holdings, which increased by EUR 29m, or almost 50% YoY. Meanwhile, on a MoM basis, the largest increase was recorded in cash holdings, which grew by EUR 34.7m, or 21.6%. On the other hand, shareholdings recorded a decrease of EUR 63.6m, or 2%, followed by a EUR 20.1m decline in investment funds, or 6.9%, as well as a decrease of EUR 9.9m, or 1.4% in bond holdings.
Total assets of Slovenian mutual funds (June 2007 – September 2023, EURbn)
Source: ATVP, InterCapital Research
Of course, the change in the value of these funds can come in several ways. Firstly, the change in the inherent value of the underlying assets. Secondly, the decision of the fund managers to re-allocate certain funds from one asset type to another. Thirdly, the decision of the investors of these funds to increase/decrease their investments. To gauge this, we can look at the net contributions of the funds, which amounted to EUR 35.6m in September 2023, an increase of 62% MoM, and 68% YoY. However, despite this increase, the last twelve months recorded net contributions of EUR 257.9m, which is still 19% lower than the same period a year ago. Besides the increase in the net contributions, September marked the continued growth in the number of subscribers, which reached 525.3k, an increase of 0.4% MoM, and 3.8% YoY.
Net contributions into the Slovenian mutual funds (January 2016 – September 2023, EURm)
Source: ATVP, InterCapital Research
Out of all the asset categories in the funds, the largest is maintained by shares, at 70.8%, which is an increase of 2.5 p.p. YoY, but a decrease of 0.7 p.p. MoM. Following them we have bonds at 15.9% of the total, representing a 0.1 p.p. decrease both YoY and MoM, as well as money market, deposit & cash holdings, at 6.6%, with a decrease of 2.6 p.p. YoY, but an increase of 0.9 p.p. MoM. Finally, we have investment funds, which accounted for 6.1% of the total, increasing by 0.1 p.p. YoY, but decreasing by 0.4 p.p. MoM. As the shareholdings are the largest category by far, it is also worthwhile to look at how they developed. Breaking this down further, home issuers’ equity securities amounted to EUR 54.2m, increasing by 3.5% YoY, but decreasing by 0.7% MoM. These accounted for 1.72% of the total equity holdings. As such, foreign issuers’ equity securities amounted to EUR 3.1bn, growing by 20.1% YoY, but decreasing by 2% MoM.
Equity holdings of Slovenian UCITS funds (October 2007 – September 2023, EURm)
Source: ATVP, InterCapital Research
This would mean that for the 2nd month in a row, the decline in the value of foreign equity securities has been the driver of the overall MoM decreases of AUM we have witnessed. Given the current macroeconomic and geopolitical situation, however, this isn’t that surprising. Furthermore, if we look at what grew the most MoM, it was the cash holdings, one of the most liquid, and least risky types of assets.